Quarterly Economic Commentary, Autumn 2025

Forecast Overview:

• The economy continues to perform robustly. The most recent data show strong growth in consumption expenditure (+3% in Q2), in employment (+2.3% in Q2) and in tax receipts (+4.4% to end August). We expect this positive situation to continue over the forecast horizon and see modified domestic demand (MDD) growing by 3.8% in 2025 and by 3.2% in 2026.

• Since our last Commentary, the US and the EU reached an agreement on tariffs, which has removed a considerable amount of uncertainty from the economic landscape. While this agreement reduces uncertainty in the short term, the new situation of a 15% tariff represents a deterioration in our trading environment and will likely be impactful for many firms and sectors. It is also important to be mindful of continuing uncertainties. Geopolitics continue to be volatile. The US is making threatening noises about the EU’s regulation of the digital space, with ongoing suggestions of retaliatory actions. While the most immediate threat of punitive US tariffs has been removed for now, the longer-term trend against continued trade liberalisation remains a threat to Ireland’s economic model. Finally, the odds on a recession in the US are now 50/50 according to Moody’s forecast model, with potential consequences for Ireland.

• In Q1 2025, there was a large increase in exports, which most commentators interpreted as being a pre-emptive reaction to threatened tariffs, particularly with regard to pharmaceutical exports. While Q2 saw a significant scaling back on this growth rate, pharmaceutical exports continued to grow strongly year on year in Q2. Data for July 2025 point towards a drop off in pharma exports relative to the same month in 2024, and assume a fall back will continue through 2025. We expect exports to grow by 6.1% in 2025 and by 0.9% in 2026.

•  In Q2 2025, there was a welcome rise in housing output to 9,200 completions in the quarter, bringing completions for the first half of the year to over 15,000. For 2025, we have revised our forecast for housing completions up to over 35,000 but our forecast for 2026 is reduced to just under 36,000, based in part on a notable slowdown in commencements this year following the policy-related spike in 2024. We also note an increase in construction sector earnings relative to other sectors. While this might partly explain the marked increased in construction employment over the last 12 months (which is to be welcomed), it also points to increased construction costs, which could have implications for the delivery of the National Development Plan and achieving housing targets.

• Looking to other issues, inflation remains relatively low and this will contribute to both real wage growth and consumption growth in the months ahead. However, we discuss the notable increase in grocery inflation and differential impacts across the income distribution. On employment, growth remains positive but some tentative signs of a softening in the labour market is evident in the most recent data. The rate of employment growth is easing, the rate of unemployment is nudging higher, earnings are increasing at a decreasing rate and the number of employment permits being issued for roles outside of the public sector is slowing. On the public finances, while tax revenues remain strong, higher-than-planned rates of expenditure growth suggest that the budget surplus will be lower in 2025 compared to that projected at the time of the Budget.

• In our assessment, we discuss the ongoing strong economic performance and the reduction in immediate tariff-related risks following the US–EU agreement. However, we point to the continuing risks such as tensions between the US and EU on digital regulation and possible actions on the part of the US. In the context of efforts by the US to hinder international trade, we discuss the Government’s stance on the Mercosur trade deal and question whether opposition is an optimal position at a time when the promotion of free trade is important for Ireland. We also discuss the upcoming Budget. We explain why a tighter fiscal stance may be appropriate compared to that of recent years based in part on concerns about overheating and consequences for successful delivery under the National Development Plan and housing targets.

• The Commentary includes two additional pieces of analysis. The first by John FitzGerald examines the pharmaceutical industry in Ireland and assesses the likely impact of the 15% rate. The second, by Paul Redmond and Luke Brosnan, introduces a new data series that draws on information provided by LinkedIn, and which will allow us to look at changes in hiring rates across sectors with a much shorter time lag than has been possible to date.